The Cost Performance Index (CPI) is a crucial metric in project management that indicates the cost efficiency of a project. It is calculated by dividing the earned value (EV) by the actual costs (AC) incurred. The CPI provides a quantitative measure of how well the project is adhering to its budget.
- Formula: CPI = EV / AC
- Earned Value (EV): The value of work actually performed expressed in terms of the approved budget.
- Actual Cost (AC): The actual cost incurred for the work performed.
- Interpretation:
- CPI > 1: Indicates that the project is under budget. For example, a CPI of 1.2 means that for every dollar spent, $1.20 worth of work has been accomplished.
- CPI = 1: Indicates that the project is exactly on budget. For every dollar spent, one dollar’s worth of work has been accomplished.
- CPI < 1: Indicates that the project is over budget. For example, a CPI of 0.85 means that for every dollar spent, only $0.85 worth of work has been accomplished, indicating a cost overrun.
- Example:
- If a project has an Earned Value (EV) of $50,000 and an Actual Cost (AC) of $60,000:
- CPI: CPI = $50,000 / $60,000 = 0.83
- This means that for every dollar spent, only $0.83 worth of work has been accomplished, indicating a cost inefficiency.
In summary, the CPI is a vital indicator of cost efficiency in a project. It helps project managers understand whether the project is staying within its budget and provides insights into potential cost overruns or savings. A CPI greater than 1 indicates cost efficiency, while a CPI less than 1 indicates cost inefficiency.
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